Finance Crisis Hits West Side Projects

Larry Silverstein, Tom Elghanayan, Jeff Levine, William Dickey and Steve Witkoff are staring a new monster in the face: the end of cheap financing that was supposed to help them settle Manhattan’s wild West Side.

These five real estate developers thought they had it made last year when the state Housing Finance Agency approved their applications for tax-exempt bonds. But the incoming Spitzer administration noticed something funny: the rental boom was eating up all of the state’s available bond volume. So, the administration froze the financing.

Counting several other projects at earlier stages of the approval process, the HFA has $4.8 billion worth of applications for tax-exempt bonds pending; it only expects to be able to dole out $590 million this year.

Tax-exempt bonds are privately issued and guaranteed, but they cost the federal government in taxes that are not collected on the interest that investors earn from them. They are, therefore, limited to projects with a public purpose–in this case, apartment buildings with at least 20 percent of their units priced to be affordable for low-income households.

The federal government also limits the total amount of private-activity tax-exempt bonds that New York State can authorize to $1.6 billion a year, based on a per capita allowance. Albany, in turn, traditionally directs $200 million to $300 million of that amount to the state Housing Finance Agency, with the rest going to economic development projects, the dormitory authority and other similar agencies. Most years, developers don’t need more than this $200 million to $300 million.

Because they are not taxable, the bonds are more attractive to investors, and consequently have interest rates that are between 1 and 1.5 percent a year lower than taxable bonds–a savings that directly adds to a developer’s bottom line and is enough to induce even traditional market-rate developers to produce limited affordable housing. Indeed, in Hudson Yards, West Chelsea and Greenpoint-Williamsburg, developers are all but certain to do these 80-20s, because new zoning rules permit them to build bigger buildings if they include affordable components.

But, because of the overwhelming demand, incoming HFA President and CEO Priscilla Almodovar is establishing new criteria that will make it more difficult to qualify for tax-exempt bonds. She told The Real Estate on Friday morning that instead of considering the cost of the project as a whole, she will consider the amount of tax-exempt bonds requested for each affordable unit, and will cap that amount at somewhere between $1.5 million and $2 million. Ms. Almodovar said she hopes this new system will encourage developers to create more affordable housing.

“We want to allocate [the available bonds] in a way that is fair and equitable,” Ms. Almodovar said. “Our public mission is to create housing for low- and middle-income families. The criteria we are coming up with does that by maximizing the affordable units we can get out of the bond cap we have available.”

Mr. Silverstein, for instance, is requesting $656 million in tax-exempt bonds for his 1,157-unit River Place 2 building at 600 West 42nd Street, or $647,527 per unit. But since he is only producing 232 affordable units, the HFA would look at another number: $2.83 million per affordable unit.

Mr. Silverstein and the other developers with applications pending will be asked to resubmit their applications. They could decide to increase the number of affordable units or decrease their funding requests, making up the difference with taxable bonds. Both methods would increase developers’ costs–possibly raising the market rents they need to charge. The shortage, if not resolved, could also slow development of the very neighborhoods that the Bloomberg administration has targeted for housing growth through massive rezonings.

Shaun Donovan, the commissioner of the city Department of Housing Preservation and Development, when asked whether such a slow-down would occur, said, “I don’t beleive so. It’s possible, but I think the criteria the state has laid out should allow these deals to go forward.”

He added, “I think the state is doing the right thing in terms of making more effective use of its resources.”

Mr. Donovan said that developers can tap into “billions of dollars” of capital available through the Mayor’s New Housing Marketplace plan to do 80-20 projects instead of seeking tax-exempt bonds. However, he said the city is just as stringent as the state will become in capping the subsidy for each affordable unit.

The Real Estate Board of New York would like to see another solution, arguing that developers cannot afford to create more affordable units or reduce their costs.

“If people could increase the number of low-income units that are in the project, that means they may not have needed the tax-exempt bonds,” REBNY President Steven Spinola said. “One solution is to make the pie bigger.”

In other words, get Washington to up that $1.6 billion cap–or get Albany to devote more of that $1.6 billion to the HFA.

Ms. Almodovar, who has been discussing the issue with Mr. Spinola and REBNY Chairman Steve Ross over the past few weeks, said other criteria would also be used to rank projects, such as how important they are to the city. She will spell those out in a letter to the affected developers in the next two days.